Investors need to know if China’s sensational economic growth over the past decade will continue if they are to be confident about putting their money into certain types of stocks. A number of sectors, most notably Basic Materials, Energy, and Industrial, have enjoyed strong support as China (and India, for that matter) catch up to the rest of the world in terms of GDP per person. China consumes 40% of the world’s copper and zinc, is the force behind much of the increase in demand for oil, and drives much of the demand for heavy equipment. That benefits global companies such as Freeport-McMoRan Copper & Gold (FCX), Chevron (CVX - Free Chevron Stock Report) and Caterpillar (CAT - Free Caterpillar Stock Report), which enjoy higher prices for their products.

One of the problems with assessing China’s economy is that is that the data emanating from that nation are less comprehensive than stateside, making it more difficult to accurately gauge what is going on. The headline GDP growth number, at 9.1% for the third quarter of 2011, remains impressive, but it is less than the 10%-plus rates achieved a few years earlier as government officials address a serious inflation threat.

Addressing inflation is a normal response by policymakers, but there are additional reasons to be uneasy about China’s rapid growth. Specifically, there are indications that some of the construction projects under taken in recent years are hardly being utilized. Media reports of almost entirely empty newly created cities have surfaced, which have led to concerns about the sustainability of China’s economic miracle, and that a portion of it may be hollow.

Now, it is often the case that builders build ahead of demand, resulting in low occupancy rates for sites, such as hotels or apartment buildings, in their early years. To an extent, that appears to be what is happening in China. But here is the twist: The residences in these newly constructed, almost empty towns, often built inland or away from the booming cities on the coast, appear to be largely sold, even as they are unoccupied. Speculators, and people in China without other avenues to invest, have been putting their cash into real estate to capitalize on the nation’s boom, figuring that these apartments eventually will become more valuable. The trouble is that many apartments (millions, by some accounts) may remain vacant because the rents being asked are out of reach for much of the working population. 

We have all seen the after-effects of bursting property bubbles, first in Japan and now in the United States. Economic growth is stunted for years, as homeowners and financial institutions take time to recover. China’s situation is somewhat different in that the government still has a major hand in land ownership. China also has the benefit of a huge cash hoard from its booming export business. So the nation could be financially well off enough to forestall any possible day of reckoning for quite some time. China also appears to be starting to address the need for affordable housing. 

Nevertheless, the disconnect in China’s housing market carries the potential for trouble. If, say, China’s shipments to Europe and the United States were to slow dramatically, that could pressure its economy and possibly lead to a sharp downturn in real estate values. Hopefully, that won’t turn out to be the case and China’s economy will experience a soft landing. But investors need to remain vigilant, since an economic hard landing in China could very well shake the stock market’s underpinnings over here. 

At the time of this article, the author did not have positions in any of the companies mentioned.